The two companies already co-operate on building new sites, but this new national grid will extend the relationship further – enabling the companies to reduce costs and compete with Everything Everywhere, the UK’s largest mobile operator.
VodaO2 or O2Fone? Vodafonica? Telefone won’t work.
Both O2 (Telefonica UK) and Vodafone will be able to run 2G, 3G and the soon to be launched 4G on the same network, while retaining each other’s independent spectrum – following the outcome of the year end 4G auction, to be administered by market regulator Ofcom.
Both companies will retain complete control over their wireless spectrum, core networks and customer data. Both have said they will continue to actively compete with each other in all products and services.
The plan will allow the two companies to reach their 2G and 3G coverage obligations in 2015, ahead of Ofcom’s 2017 requirement of 98% coverage. It also means 4G can work to this same schedule.
"This partnership is about working smarter as an industry, so that we can focus on what really matters to our customers – delivering a superfast network up to two years faster than Ofcom envisages and to as many people as possible," Telefonica UK’s CEO Ronan Dunne said.
"One physical grid, running independent networks, will mean greater efficiency, fewer site builds, broader coverage and, crucially, investment in innovation and better competition for the customer."
A new 50/50 joint venture company will be created based around both companies basic network infrastructure – following the model of Deutsche Telekom’s T-Mobile and France Telecom’s Orange merger into Everything Everywhere.
It will include towers and masts, which will be transferred to the joint venture or decommissioned over time. Both companies will have access to a single grid of 18,500 masts representing an increase in sites of more than 40% for each operator. The joint venture will also look at building new sites to extend coverage into rural and remote areas. The companies expect there will be a 10% overall reduction in sites.
This cost cutting is essential, as mobile users move from away from the industry’s cash cows – voice calling and texting – to extensive data usage and ‘Over-the-top’ services such as Skype to perform the same functions. This means operators are seeing expenditure on bandwidth expansion increase, while margins fall.
This kind of solidarity from the two bitter rivals would have been unthinkable just 18 months ago, and may be a response to Everything Everywhere’s (owner of Orange and T-Mobile) proposal to launch 4G on its existing spectrum prior to the auction. Ofcom has repeatedly delayed its decision, after initially supporting the proposal.
4G is of particular importance for rural areas, as it will offer broadband speeds over cellular networks and reduce the digital divide.
"This partnership will close the digital divide for millions of people across the country and power the next phase of the smartphone revolution. It will create two stronger players who will compete with each other and with other operators to bring the benefits of mobile internet services to consumers and businesses across the country," said Vodafone’s CEO Guy Laurence.
Telefónica and Vodafone are currently engaged in discussions with Ofcom with the intent of establishing the network JV later this year, following the satisfactory conclusion of those discussions.
If the proposal follows the pattern that the Everything Everywhere merger did, then O2 and Vodafone may be required to give up existing spectrum as part of an anti-competitive deal. It also suggests that the two companies are hedging their risks over concerns that Ofcom may indeed allow EE to launch 4G this year.
An Ofcom spokesperson told CBR that it was currently going through the details of the proposal, and was not in a position to discuss any regulation that might follow.
"Ofcom is currently engaged in constructive discussions with both Telefónica UK and Vodafone UK in relation to their proposed joint venture and network sharing arrangement. We will carefully consider the appropriate way forward taking into account our duties as a competition authority," he said.
Ofcom was also unclear as to what the status of EE’s 4G proposal is.
"In terms of your questions around EE’s application to refarm its 1800 MHz spectrum, the consultation responses raise a number of detailed issues that Ofcom must now consider carefully. It is important that we make robust decisions, particularly where we may have to defend them in court. We will publish a statement on the application as early as possible."
Three Mobile, owned by Hutchison-Whampoa has threatened to quit the UK if it does not get favourable treatment from Ofcom to counter EE and Telefonica-Vodafone’s domination of the sector. It is already in a network share JV with EE called MBNL, and may leverage that arrangement for its own 4G purposes.
Ovum analyst Jeremy Green believes the move by the two mobile giants makes sense.
"We did predict this as early as 2008, when we said that most countries would end up with only two physical LTE networks. It follows on from the merger of T-Mobile and Orange in the UK into Everything Everywhere," he said.
"If Vodafone and Telefonica had not also embraced sharing in this way they would have been at a competitive disadvantage. As it was, they were able to build on and extend the relationship that they already had through Cornerstone, their existing joint venture. This sets them up well for the 4G rollout and will help them catch up on 2/3G rollout too."
